To truly understand what lenders are looking for when they view your credit, you must understand the factors that make up your FICO credit score.
What Your Credit Reveals
When a lender views your credit score, they typically use your FICO score, which is the most commonly used score for vehicle purchases. FICO scores range from 300 to 850, and the better your credit, the more easily you’ll be able to finance a big ticket item like a car. Credit scores also affect your interest rate. The lower your credit score, the higher your interest rates are likely to be.
There are five factors that go into your credit score, each of them making up a certain percentage:
- Payment History: This shows a lender how you’ve handled car payments in the past. This makes up 35 percent of your credit score.
- Amounts Owed: This makes up 30 percent of your credit score. Known as credit utilization, it compares your available credit limit to the amount you owe. Lenders recommend keeping credit utilization at 30 percent or less.
- Length of Credit History: This measures how long you’ve been using credit and it’s worth 15 percent of your total score.
- New Credit: Making up 10 percent of your credit, this lists how much new credit you’ve applied for. It’s not good to open too many accounts all at once, or close together.
- Credit Mix: Your credit mix makes up 10 percent of total credit. This is how much credit you have in revolving credit (credit cards) accounts versus installment credit (mortgages and car loans) accounts.
Three Bureaus, Three Scores
Even though FICO is typically the score used for bad credit car loans, that’s not always the case. Because there are three national credit bureaus – TransUnion, Experian, and Equifax – everyone has three credit scores from these agencies alone. The scores can vary because the bureaus don’t always have the same information. Not all your credit information is reported to all three credit reporting agencies, either.
Most lenders use just one bureau, although some use more than one. Another thing to know when getting auto financing is that lenders use your auto-adjusted credit score, which weighs your car payment history more heavily than other versions of your credit score.
Preparing for an Auto Loan
Once you know what the lenders are looking for, you can prepare yourself so there won’t be any surprises when you get to the dealership. You can also check your credit reports for any mistakes and dispute them with the reporting bureau, which could potentially raise your credit score. The best way to do this is by monitoring your credit throughout the year.
Monitoring your own credit is simple since you’re entitled to one free credit report from each of the national bureaus every 12 months. To view and print yours, simply visit annualcreditreport.com. A good recommendation is to get one from a different bureau every four months to monitor your credit all year round. Though your credit reports are free, you may have to pay a small fee for your credit score.
Dealers that Meet Your Needs
When you’re dealing with bad credit, it isn’t enough to know what the lenders see in your credit. In fact, a lot of lenders don’t deal with consumers who have poor credit. For that reason, you’ll most likely need to find a subprime lender to handle your financing. Unfortunately, you can’t go directly to these lenders to get pre-approval – they only work indirectly through special finance dealerships.
Fortunately, Auto Credit Express works with a nationwide network of these dealers. Let us help point you in the right direction with a local dealer who has the lenders available to help your unique credit situation. It’s simple to get started, just fill out our free, no-obligation online auto loan request form today!